Ben Elowitz on the Future of Digital Media

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Advertising’s Reverse Big Bang

This article was published as a guest post in AllThingsD, and is republished here for Digital Quarters readers.

These are exciting times for advertising, as new technology and new forms of media are bringing advertisers new ways to reach audience, with far better targeting and measurement than ever before. It’s truly a boom time for ad tech, and one might think that means the sky’s the limit for the growth of advertising. The only bad news is that instead, this explosion of technology is exactly what’s going to make the advertising market go bust.

That’s because ad technology advances are moving in one consistent direction toward commoditization and efficiency, contracting the market as they straighten it out. Unfortunately, the dark matter of topline can’t be ignored. But the good news is there is still time to achieve escape velocity, if you plot the right course. The way to resist the gravity is to think differently about your value proposition.

The Explosion of Ad Tech

Ever since the 18th century handbill, there has been only a fuzzy link between what an advertiser pays and what the advertising is actually worth. Even today, most ad spend is nearly untraceable – television still gets the lion’s share, and it’s one of the least measurable and most expensive mediums.

The definition of advertising nirvana is meaningful measurement: knowing not just how much advertising was delivered, but to whom and to what end. Digital media promised deliverance with its rich data and constant monitoring, and on this promise waves of ad-tech startups have been born. Want to boost your ROI by programmatically buying the best ads in the best placements at any given moment? AppNexus has an app for that. Want to eliminate wasted impressions by targeting your audience with surgical precision? BlueKai’s got your back.

And there are hundreds of other upstarts vying to fix your inefficient ad spend with their own proprietary software. While they’re at it, they each hope to bite off a piece of the $500 billion advertising market.

The Black Hole of Commoditization

The problem is that once they get that bite, they’ll find the new pie of advertising-made-efficient to be a comparatively meager meal.

This is the way disruption often works – new improvements don’t always equal bigger profits. The Open Source movement in the late 90s – which gave rise to a whole generation of new technologies and businesses – actually cost the software market $60 billion per year in lost revenue, in large part because it enabled developers to unbundle expensive enterprise packages and sell the customer only the necessary bits. In 2001, the decimalization of the US stock market – initiated by the SEC to make the market more investor-friendly and efficient – narrowed spreads and consequently shrank NASDAQ trading floor revenues by 70%. And let’s not forget about what happened when device manufacturers digitized the music industry.

With the explosion of digital media, ad space inventory is increasing quickly (anyone checked their mobile traffic chart lately?), while at the same time advertisers are making more focused and efficient buys than ever before. If that efficiency is working, then net fewer dollars need to be spent to drive better results. Great news for advertisers – but bad news for publishers with inventory to sell. With CPMs seemingly lower all the time, a continuation of the trend toward efficient ad buys will mean a dramatic contraction of the advertising market.

Software industry disruptor Marten Mickos (former MySQL CEO) once told investors: “The relational database market is a $9 billion a year market. I want to shrink it to $3 billion and take a third of the market.” Make no mistake – today’s ad tech players are plotting the same.

Is there any chance of maintaining the $500 billion advertising market that we know today? Probably not. Like Clayton Christensen says, it’s only a matter of time before disruption wins.

But if we can take a lesson from the industries that have gone through disruption before us, it’s that the incumbents should have embraced the new business models much, much earlier. Publishers have no choice but to act now and get involved in inventing the next wave of advertising.

Gaining Escape Velocity

So how do you compete when your market is collapsing? Change the way you think about your market.

Yes, publishers sell space to advertisers. But advertisers want to buy results, not space. When media companies measure their monetizable assets, they tally up the display inventory they can sell, and the data that can boost an advertiser’s expected returns. But your assets are actually much more diverse. Embrace your range – you have a lot more than space for rent. You have:

Brand. There’s plenty of inventory on the market – just check any ad network or exchange and you’ll find more availability than you could dream of. But we all know that the same impression is far more valuable to advertisers when they’re buying it with your brand. Why? For starters, because your brand offers security and peace of mind to the buyer. “No one gets fired for buying IBM,” the adage goes, and top brands can charge a similar premium for the low career risk they offer the buying chain. And when it comes to delivering your message, nearly everyone in advertising still believes that context is important. Build it right, and your brand represents a premium you can earn to separate yourself from the commodity you sell.

Relationships. You can go even farther by leveraging not just your brand but your relationships – with brand integration. Your audience comes to you for original content in your signature style, and you know exactly what they love. Partner with your advertisers to devise creative campaigns that are tailor-made to be knockout hits with your audience. Play matchmaker and find theme-appropriate advertising sponsors for your best content pieces. In one fell swoop you’ll improve your audience’s experience and offer brilliant results to advertisers – and earn an additional premium by letting advertisers network through you.

Custom Content. In the past, media created content for the audience’s sake and then relied on advertisers to subsidize it. Today, advertisers are less willing to subsidize content – but they are more willing to pay for it in other ways. A few months ago I met with one big media company whose Custom Publishing group had suddenly seen an explosion of opportunity after many years of sluggish demand. Now that marketers are directly connected with their audiences via Facebook, Twitter, and the like, those advertisers need something to say. But despite the trendy buzz, very few brands actually have any competence whatsoever at being publishers. Companies like NewsCred, Percolate, and the one I met with are finding a business putting words in their mouths.

Technology. This doesn’t need to be the sole purview of the ad-tech startups. You have sophisticated technology already to serve your audience – start using it to help your advertisers buy placements in your feature sets, and then demonstrate the results with quantifiable proof. Google’s universe-changing innovation was to realize that a simple search keyword (the same one that Yahoo had taken for granted for years) is actually incredibly valuable for targeting. LinkedIn collects data from its audience and then uses it to surgically target for advertisers – and create results. Your own new and innovative products can help you succeed and cut out the middleman.

Results. As the universe gravitates toward complete trackability, the one sure-fire thing advertisers will keep paying for is results. Big, differentiated results – on a big scale. Brew an alchemy of your particular strengths and differentiators, and then use it to help your advertisers achieve breakthrough success. It’s harder than selling IAB ad units, that’s for sure. But ultimately that’s your best chance to drive lasting value for your clients, and ensure robust revenues to come.

A new age of advertising is upon us, and while it may be a golden age in terms of technological advancements, it certainly won’t be one of abundance. The contraction of the advertising market will force publishers to get creative and add real value with new offerings of our own. The days of selling space and access to a general audience are over. But advertisers will always need great media brands to align themselves with – which is why the biggest opportunity for media companies is to combine new technology and new formats with strong brands, and make that alignment more valuable than ever.